Date: 09/25/2000 2:13 PM
Subject: Reference File No.: S7-13-00
Dear Jonathan G. Katz, Secretary Securities and Exchange Commission:
As a CPA in public practice, I wish to take this opportunity to offer my
opinion regarding the proposed Securities Exchange Commission (SEC)
regulation "Revision of the Commission's Auditor Independence Requirements;
Proposed Rule, 65 Fed. 43, 148 (2000)," (the proposal). This opinion is
offered prior to the close of the proposal comment period, which expires
September 25, 2000.
I firmly believe the proposal, as currently written, is unwarranted, not
supported by facts, or requested by the financial and business community we
both serve. Non-audit services offered by audit firms simply have not
compromised auditor independence or added to audit failure. I offer and
believe the following support my position concerning the proposal.
· Audit firms have an excellent history, awareness and attitude of
maintaining, observing and adhering to the Independence Rules. Audit firms
are well aware of the Independence Rules in regard to non-audit services
offered by audit firms. The Independence Rules are the first and most
understood rules of audit firms. The Independence Rules for audit firms are
the first rules within the Code of Ethics and the first functional area
referenced in the Quality Control Standards as promulgated by the AICPA.
There cannot be any misunderstanding concerning the importance of the
Independence Rules by audit firms or the public.
· I cannot see a problem concerning audit firms violating the
Independence Rules as they relate to non-audit services. I am curious what
facts and circumstances were used by the Commission to determine that the
"Scope of Services" offered by audit firms has resulted in substandard
engagements through financial and auditing standards violations, since even
the SEC admits that there is no empirical evidence that non-audit services
have compromised audit quality or auditor independence, or even caused an
audit failure. None of the studies or reports cited by the SEC concluded
that the scope of services impaired audit effectiveness, or that an
exclusionary ban was necessary or appropriate. I do not believe there is
factual support for the need for such a dramatic change relevant to the
"Scope of Services" offered by audit firms.
· In the last 10 annual reports to Congress, the SEC has not
mentioned any concerns regarding the "Scope of Services" offered by audit
firms. Where has this concern originated?
· It appears to me that the SEC has ignored the conclusions of the
SEC's Panel of Audit Effectiveness of the Public Oversight Board. This SEC
appointed panel concluded, "both the profession and the quality of audits
are fundamentally sound." The Panel did not find any evidence that the
provision of non-audit services negatively impacted audit quality. In fact,
quite the opposite - the Panel instead noted that "in numerous instances
non-audit services contributed to a more effective audit."
· The proposal greatly restricts the ability of the public to
benefit from the knowledge possessed by audit firms. The financial and
business community will be forced to undertake procedures which are highly
inefficient and costly in both time and expense to procure needed non-audit
services from those that simply do not have the knowledge and understanding
possessed by an audit firm. Public companies' freedom of choice in
selecting outside professional services will be restricted. The SEC will be
forcing public companies to constantly choose whether to hire a firm solely
as its auditor or solely as a provider of these other services, when the
audit firm may be the best provider for both.
· In that same regard, the proposal's broad restriction on non-audit
services will in itself, undermine auditor independence by making audit
firms too reliant and dependent on audit fees. This dependence by audit
firms on audit fees would not serve the public interest.
· Although the proposal does clearly state that it "would not effect
tax-related services" provided by audit firms to audit clients and
references only compliance services provided by audit firms to audit
clients, it would prohibit an audit firm from acting as an advocate for an
audit client, providing expert service in administrative proceedings, and
logically prohibit audit firms from representing audit clients before the
Internal Revenue Service.
· The proposal would create a negative effect on the ability of
audit firms to recruit and retain the best talent. Professionals would not
be interested in or challenged to work with firms in which 25% - 40% of the
current market would not open to them to practice. This prohibition
concerning the ability of professionals to perform either audit or non-audit
services within a firm would limit the attractiveness of firms. Simply put,
the best will elect to enter a profession in which their ability to perform
would not be limited.
· The proposal prohibits audit firms from entering into almost any
joint venture or partnership with any entity which may offer non-audit
services to the audit firm's audit client. In addition, this proposal also
prohibits an audit firm from participating in beneficial economic activities
and business relationships. These independent, legal and sound relationships
would be prohibited because the entities participating would be treated as
"affiliates of the audit firm."
· The proposal will place new independence requirements between
audit firm members within regional alliances, associations and cooperative
agreements with respect to the audit clients of each other.
· The impact to all audit firms, regardless of having SEC audit
clients or not, will be dramatic. Other regulators will use the proposal, if
adopted, as a model. This "model" may be used by state boards of
accountancy, other federal regulators, (i.e., banking and ERISA areas of
audit practice) and other regulators.
I believe the significance of this impact requires the SEC to reconsider the
timing of the proposal because:
· The 75-day comment period is entirely too short to permit
meaningful and timely public input. This short comment period does not
permit collecting and analyzing the huge amount of data required, nor does
it provide enough time to formulate meaningful and viable alternatives for
regulating the "Scope of Services" offered by audit firms.
· Three years ago the SEC set up the Independence Standards Board
(ISB). I believe the work of the ISB is being pre-empted by this proposal.
The ISB, as originally charged by the SEC, was to develop new concepts and
framework regarding auditor independence and related implementation.
· Recently, the ISB, NYSE, NASD, American Stock Exchange and the SEC
have adopted new disclosure and audit committee requirements. This proposal
and its timetable have not given enough time for those requirements to
mature and work.
· The proposal's timetable has been presented in the last days of
the current Presidential administration. The lateness within this
administration, and the limit on public input, will not provide opportunity
for input from Congress and the new administration.
In addition, I must question the authority of the SEC in regard to this
"Scope of Services" rule. The authority cited by the SEC in the proposal
pertains to the filing of public companies' financial statements that have
been audited by independent audit firms. This authority does not provide for
making rules that govern and regulate the audit profession itself. The
proposed rules clearly concern the "appearance of independence." The
proposal neglects to address any issues, facts or circumstances concerning
the additional requirement concerning independence "fact." Since inception,
the independence rules have been defined by an auditor's independence in
regard to "appearance and fact." I question whether the SEC has statutory
authority to impose restrictions because of possible "perceptions" about
lack of independence.
In as much as this proposal is a fundamental change to one of the most basic
and observed rules of the audit profession, I urge the Commission to defer
its adoption to afford more time for input from the CPA profession, public
entities, and other interested parties.
Thank you for your consideration.
Sincerely,
Charley Shumway, CPA
Leverich Rasmuson Banyard
180 South 300 West, Suite 300
Salt Lake City, UT 84101-1228